KSK Energy Ventures IPO Analysis

KSK Energy Ventures (KEVL) develops and operates power generation projects through various special purpose vehicles (SPVs). It is a step-down subsidiary of KSK Power Venture Plc, listed on the London Stock Exchange. Through its wholly owned subsidiary KSK Energy of Mauritius, KSK Power Venture Plc will hold a 55.24% stake in post-issue equity capital (pre-issue 61.39%)of KEVL. S. Kishore and K.A. Sastry are the promoters of the company.

Currently , KEVL operates three power projects with an aggregate capacity of around 144 MW. It has two projects with an aggregate power generation capacity of 675 MW under construction. The aggregate generation capacity of projects in the pipeline is 8,318 MW.

Of the three operational power plants, two are dedicated coal-based captive power plants of 43 MW each in Chattisgarh and Andhra Pradesh. The Chattisgarh power plant is owned by Arasmeta Captive Power Company, with KEVL owning a 51% stake, and is dedicated to the captive power requirement of Lafarge Cements. The Andhra Pradesh plant is owned by Sitapuram Power, with KEVL’s stake at 49%, and is dedicated to the captive power needs of Zuari Cements. The third operational power plant,, Sai Regency Power Corporation, is a gas-based combined cycle group captive power plant in Tamil Nadu, with KEVL holding a 73.92% stake ,and meets the captive power requirement of companies such as Chemplast Sanmar, Lakshmi Mills, Orchid Pharma, and Elforge. The Arasmeta, Sai Regency and Sitapuram power projects were synchronized with the grid on May 2006, February 2007 and July 2007, respectively.

Of the projects under development, a lignite-based power project with an generation capacity of 135 MW in Rajasthan is scheduled to be operational by October 2008. Another 540-MW coal-based power project at Warora in Chattisgarh is likely to be operational by December 20’09. KEVL has secured debt financing and intends to commence construction for the three projects with an aggregate generation capacity of 1,973 MW. The company has plans for three more projects with an aggregate capacity of 6,345 MW.

In January 2008, KEVL divested its stake in the SPVs of the three operating power companies, under the restructuring plan between the promoter groups of the company and LB India Holdings Mauritius I, to the ‘Small is Beatutiful Fund’. Besides this divestment, the company picked up 100% of the shareholding in KSK Electricity Financing India, previously a 51:49 joint venture between the company and LB India. It has divested its stake fully in RVK Energy (20 MW), Kasargod Power (20 MW) and Coramandel Power. The stakes in these erstwhile subsidiaries along with investment in Athena Projects were transferred to promoter group company KSK Energy Company, in which parent Mauritius-based KSK Energy holds 100% stake.

KEVL is tapping the capital market with an IPO to facilitate equity infusion in Wardha Power Company to meet the equity component of the 1,800-MW Wardha Chattisgarh power project and to meet general corporate expenses.

Strengths

On completion of all planned projects, there will be a fairly diversified plant mix of geography and fuel supply. The plants will be spread over seven states, with eight coal-based plants, one lignite-based plant, one natural gas-based plant and three run-of-the-river hydroelectric plants.

Weaknesses

Power generation capacity, operational or under construction, amounts to just 819 MW of the proposed power generation capacity of 9,137 MW by 2013. Yet to appoint engineering, procurement and construction (EPC) contractors for the balance 8,318-MW power generation capacity. The supply constraints at the equipment as well as the execution contractors side expose it to high level of execution risk. With rising commodity prices, escalation in project cost can also be significantly higher.

Lacks experience in developing and operation of power plants of higher capacity as well as the magnitude proposed. Current operational projects and projects under construction are thermal power units and execution of hydel power projects, which are more complex with long gestation periods, needs to be seen.

Yet to sign a definite fuel supply agreement (FSA) for the 540-MW Wardha Warora Power Project in Maharashtra, expected to be operational by December 2009. Similarly, still in negotiating for fuel supply for the 43-MW Arsmeta expansion project. Yet to sign definite FSA for three 1,800-MW coal-based power projects (one at Chattisgarh and two in Orissa) even though an MOU has been signed.

Still to finalise the power purchase agreement and fuel supply for generation capacity of 8,500 MW.

Of the three operational power projects, the Sitapuram Power SPV continues to be in red with net loss of Rs 1.91 crore in the year ended March 2008 (FY 2008). A shareholder agreement with Zuari Cements relating to Sitapuram Power SPV contains an onerous provision giving option to ZCL to pick up the entire 49% stake in the SPV after the third anniversary ( 1 March 2011) of commercial operation of the Sitapuram power plant .

Proposes to add 8,993 MW of power generation capacity by 2013. The estimated infusion of equity into SPVs will be a staggering Rs 8000 crore on the assumption that all the proposed projects will be funded through a debt: equity mix of 70:30. Currently, only about Rs 883 crore is to be raised by the IPO. So there will be significant equity dilutions in future.

Certain SPVs will pay project development and support fees to group company KSK Energy Company .

The power purchase agreement for captive power plants provides for fixed rates and have limited passthrough.

An affiliate of Lehman Brothers will hold 28.41% of the equity capital after the IPO. Lehman has been in the news for the severe subprime problems it is facing.

Valuation

Due to the benefits of commissioning two new power projects, the restated consolidated net sales of KEVL were up 208% to Rs 239.13 crore in the fiscal ended March 2008 (FY 2008). Net profit rose 476% to Rs 108.65 crore. The figures for FY 2008 are not comparable with those of FY 2007 as the company has divested three of its operating power plants to a group company under the restructuring plan implemented n January 20’08. Further, the sales were boosted by project-development fees of Rs 23.36 crore and power-arrangement income of Rs 23 crore. On post-IPO equity of Rs 346.11 crore, the EPS for FY 2008 works out to Rs 3.3. The P/E is 72.7-77.3 at the price band of Rs 240-Rs 255.

KEVL will have the full benefit of the operation of Sitapuram plant in FY 2009. And with the 135-MW lignite power project getting commissioned by December 2008, the company will get significant revenue upside in FY 2010 as well.

With 144-MW (current) power generation capacity, KSK Energy Ventures will have a market capitalisation of Rs 8826 crore at the higher price band, while an equivalent payer like GIPCL has a market cap of Rs 1305 crore with higher 555-MW power generation capacity. Having learnt the lessons, stock markets are unlikely to give huge market capitalisation to companies like KEVL just based on their lofty plans.